U.S. shutdown seen dragging on as debt ceiling fight nears

(Reuters) - The shutdown of the U.S. government appeared likely to drag on for another week and possibly longer as lawmakers consumed day three of the shutdown with a stalling game and there was no end in sight until the next crisis hits Washington around October 17.

Bowing to the reality that the impasse requires him to remain in Washington, President Barack Obama cancelled plans to attend summits in Indonesia and Brunei next week. Earlier this week, he cancelled visits to Malaysia and the Philippines because of the shutdown.

October 17 is the date Congress must raise the nation's borrowing authority or risk default, and members of Congress now expect it to be the flashpoint for a larger clash over the U.S. budget as well as President Barack Obama's healthcare law.

The situation gives "every appearance of getting dangerously close to the conversation on the debt ceiling," said Nancy Pelosi, the Democratic minority leader of the House of Representatives.

In fact, she said, "We're in the conversation on the debt ceiling."

At the same time, hopes that the debt ceiling fight could be resolved without a catastrophe were raised by reports in The New York Times and Washington Post that House Speaker John Boehner told other lawmakers he would work to avoid default, even if it meant relying on the votes of Democrats, as he did in August 2011.

A spokesman for Boehner would neither confirm nor deny the reports, restating previous public statements by the speaker that "the United States will not default on its debt."

Senator Charles Schumer, the second-ranking Senate Democrat, reacting to the reports, said, "This could be the beginnings of a significant breakthrough."

The New York senator added, "Even coming close to the edge of default is very dangerous," as he urged quick passage of legislation to raise the $16.7 trillion cap on borrowing.

There was little action along with the talk on Thursday. The Republican-controlled House continued what has become a long process of voting to fund publicly popular federal agencies - like the Veterans Administration, the National Park Service and the National Institutes of Health - that are now partially closed.

Republicans know that neither the Democratic-controlled Senate nor Obama will go along with such an approach, but it allows them to accuse Democrats of working against the interests of veterans, national parks and cancer patients.

House Republicans on Thursday began lining up 11 more bills to fund targeted programs. They are to fund nutrition programs for low-income women and their children, a program to secure nuclear weapons and non-proliferation, food and drug safety, intelligence-gathering, border patrols, American Indian and Alaska Native health and education programs, weather monitoring, Head Start school programs for the poor and other aid for schools that rely heavily on federal assistance.

Disaster assistance also is slated for temporary renewal under the House measures, as well as a bill to provide retroactive pay to federal workers during the government shutdown.

"We're trying to see if we can get the Senate and the president to start talking to us, on anything. They're just not talking to us," said Republican Representative Mario Diaz-Balart of Florida, explaining the tactic.

The bills are likely to be debated on the House floor over coming days, not all at once. Democrats have rejected the piecemeal approach and Obama has said he will veto the measures.

'STOP THIS FARCE'

In a speech at a Maryland construction company on Thursday, Obama challenged Republicans to "stop this farce" by allowing a straight vote on a spending bill. He reiterated he will not negotiate on the spending bill or the debt ceiling.

Obama said there were enough Republicans willing to pass a spending bill immediately if House Speaker John Boehner would allow a vote on a bill without partisan conditions attached, a so-called clean vote. But Obama said the speaker was refusing to do so because "he doesn't want to anger the extremists in his party."

"My simple message today is 'Call a vote,'" Obama said. "Take a vote. Stop this farce, and end this shutdown right now."

Work in Congress was interrupted on Thursday afternoon when the U.S. Capitol was locked down briefly due to gunshots fired outside the building. One female suspect was shot dead after a brief car chase across downtown Washington. Police said it appeared to be an isolated incident.

The security alert halted work in both the House and the Senate and briefly diverted attention from the shutdown that took effect at midnight on Monday (0400 GMT on Tuesday), leaving nearly a million federal workers sidelined without pay and many others in the private sector suffering from the knock-on effect.

The Capitol Police who responded to the incident are working without pay due to the shutdown - they are deemed essential and so remain on the job, but their pay is frozen.

ECONOMIC WARNINGS

In his speech earlier, Obama warned that as painful as the government shutdown was, a default caused by a failure to raise the debt limit would be dramatically worse for the economy.

Alhough some moderate Republicans have begun to question their party's strategy, Boehner so far has kept them largely united with the small bills to reopen national parks, restore health research and other parts of the government most visibly affected by the shutdown.

The Tea Party Express, one of the anti-tax groups in the conservative Tea Party that has led the fight against Obamacare, sent an email to supporters on Wednesday evening saying that as many as 12 Republicans had indicated they were willing to "give up on the fight" and join Democrats in voting for a funding bill without conditions.

"We need your immediate support to put pressure on the weak Republicans to pass a sensible solution that allows America to avoid the Obamacare train-wreck, while fully funding the federal government," the group said in its email.

The U.S. Treasury warned on Thursday about the "catastrophic" impact of a debt default, saying a failure to pay the nation's bills could punish American families and businesses with a worse recession than the 2007-2009 downturn.

Major stock markets fell on Thursday, while the dollar dropped to an eight-month low over concern the budget standoff would merge with the coming fight over raising the U.S. borrowing limit.

The U.S. Labour Department on Thursday said the government's September employment report, the most widely watched economic data both on Wall Street and Main Street, would not be released as scheduled on Friday due to the shutdown.

Despite the shutdown, Republicans have failed to derail Obama's controversial healthcare law, which passed a milestone on Tuesday when it began signing up uninsured Americans for subsidized health coverage.

Obama blamed the shutdown on Republicans' "obsession" with reversing healthcare reforms passed in the Affordable Care Act, but noted they had been passed by the House of Representatives and the Senate and been deemed constitutional by the Supreme Court.

"Last November, the voters rejected the presidential candidate that ran on a platform to repeal it," he said on Thursday. "So the Affordable Care Act has gone through every single democratic process, all three branches of government. It's the law of the land. It's here to stay."